Category: Actuarial and Risk

Stress and scenario testing are important risk assessment tools. They also provide useful ways to prepare in advance for adverse scenarios so that management doesn’t have to create everything from first principles when something similar occurs.

But trying to imagine scenarios, particularly very severe scenarios, isn’t straightforward. We don’t have many examples of very extreme events.

Some insurers will dream up scenarios from scratch. It’s also common to refer to prior events and run the current business through those dark days. The Global Financial Crisis is a favourite – how would our business manage under credit spread spikes, drying up of liquidity, equity fall markets, higher lapses, lower sales, higher retrenchment claims, higher individual and corporate defaults, switches of funds out of equities, early withdrawals and surrenders and increased call centre volumes?

He gives a starting set of pros and cons, many of which are interesting. That, and the comments on his post, left me a little confused as to what was actually being proposed.

Here are my thoughts.

Actuarial exams are predictive of later success

Although there are obviously exceptions, I’ve found performance in actuarial exams to be a strong predictor of the quality of work and later career success. No system is perfect, but discarding a system that works because it has some false negatives requires more evidence on the extent of false negatives vs true positives.

I recall one of the reasons employers hire PhDs is because it proves a level of commitment and determination and focus and work ethic and (also) smarts. So too with a tough set of actuarial exams.

The exams don’t test every relevant capability that we might want from an actuary – there are a range of other requirements to become an actuary which address at least some of these.

The proposal was for removing exams, but…

Removing the exams because “some students aren’t good at taking tests” is a very different point from removing the underlying course material or the need to study and understand them. The actual time taken for the exam is negligible.

If the idea is to not bother understanding the material at an in-depth level, then I have additional concerns. But that wasn’t what was actually proposed.

The solution to “some people being bad at taking tests” is not to scrap all the study material. The solution to the problem of “the study material isn’t keeping up with demands” isn’t to scrap exams.

The material underlying the exams should not be dismissed just because it isn’t all about machine learning and CRISPR. A critical challenge in not being forced to have depth of knowledge on areas, even if the details become hazy over time, is the understanding of the boundaries of one’s knowledge and the extent to which the problems encountered already have possible solutions. There is a world of difference in understanding material at a level to pass an exam and what can be gleaned from reading an article or skimming a book.

How would an actuary know when to ask for help? Are we really sure the extent of mentoring in the actuarial profession is good enough for everyone? Better informed actuaries will better be able to critically evaluate the guidance they receive.

Should the exams actually be harder?

Incidentally, I’m generally more concerned about false positives. I’d be happy to see regularly updated exam materials that are broader and more complex and, yes, harder than current materials.

Improving actuarial education

Actuarial education has not been stagnant. Should we strive for faster change and better improvements? Should we focus more on the use of technology enablement and add additional short courses on cutting edge topics? Should the profession better understand what is predictive of later success, self-reported or otherwise?

Mortality rates are estimated anywhere between 30% and 100% without treatment. Many estimates are towards the top end of this range, 80% to 95%. Treatments are available (mostly antibiotics) and are generally effective. Mortality rate where adequate treatment is administered within 24 hours can be 11%. (Either “just 11%” or “11%!” depending on whether you’re counting up from 0% or down from 95%.)

Some markets have banned sale of insurance alongside lending

Another way to deal with the problem of competition in credit life is to simply not permit the sale of insurance at the same time as the loan. This means that more providers will have an opportunity to make the sale since the lender doesn’t have the ability to slip the product in alongside the loan.

Some problems:

Overall this will increase acquisition costs as it is extremely cost efficient to distribute along with the loan granting process.

The lender is still in the best position to follow up with an outbound sales lead in the days or weeks after the loan has been granted (unless they are prohibited from selling at all, which is another option that can be considered)

Lenders may not be prepared to lend without the protection of credit life in place

The reality remains that for some lenders, for some loans and for some credit life policies, the product acts as a source of revenue rather than a risk mitigant. Without that extra revenue, the loan might not be viable due to risks and expenses of collecting the installments.

In this post I want to discuss substitute policies again, talk about cover for self-employed persons and definitions of waiting periods.

What is a substitute policy

Substitute policies are one of the few drivers of real potential competition and therefore competitive markets for credit life in South Africa. That’s probably not the definition you were expecting but nevertheless it is true.

With some exceptions, credit life is not sold in a competitive or symmetrical environment and customers have little or no bargaining power.

A substitute policy is a policy from another insurer (not connected to the lender) that covers the same or similar benefits and legally must be accepted as a substitute for the cover required by the lender under the terms of the loan.

Historically, the rate of substitute policies was tiny. Often less than 1%. Lenders and their associated insurers weren’t exactly incentivised to make it an easy process. For smaller loans and therefore smaller policies, the incremental acquisition costs can be prohibitive.

Substitute policies are gaining momentum

I am aware of several players specifically targeting existing credit life customers and aiming to switch these customers to their own products.

This has been enabled through:

standardising of credit life policies

bulking of many different small credit life policies into a larger one that is more cost effective to acquire and administer

technology (digital / online especially but also call centres) that can moderate costs

the growing awareness of how profitable these policies often are for a standalone insurer, even at the various caps imposed.

Lenders may need to supplement revenue on high risk customers because interest rate caps apply, but the stand alone insurer is focussed on a reasonable underwriting result, not the level necessary to offset costs elsewhere.

What counts as a substitute policy / minimum prescribed benefits

A substitute policy simply needs to cover the minimum benefits from section 3 of the credit life regulations. This covers death, permanent disability, temporary disability and unemployment or loss of income.